We evaluate segment performance based on Segment adjusted income from continuing operations before income tax, which we define as (Loss) income from continuing operations before income tax and before acquired in-process research and development charges; acquisition-related and integration items, including transaction costs and changes in the fair value of contingent consideration; cost reduction and integration-related initiatives such as separation benefits, continuity payments, other exit costs and certain costs associated with integrating an acquired company’s operations; certain amounts related to strategic review initiatives; asset impairment charges; amortization of intangible assets; inventory step-up recorded as part of our acquisitions; litigation-related and other contingent matters; certain legal costs; gains or losses from early termination of debt; debt modification costs; gains or losses from the sales of businesses and other assets; foreign currency gains or losses on intercompany financing arrangements; and certain other items.
Certain of the corporate expenses incurred by the Company are not directly attributable to any specific segment. Accordingly, these costs are not allocated to any of the Company’s segments and are included in the results below as “Corporate unallocated costs.” Interest income and expense are also considered corporate items and not allocated to any of the Company’s segments. The Company’s Total segment adjusted income from continuing operations before income tax is equal to the combined results of each of its segments.
Branded Pharmaceuticals
Our Branded Pharmaceuticals segment includes a variety of branded products in the areas of urology, orthopedics, endocrinology, medical aesthetics and bariatrics, among others. The products in this segment include XIAFLEX®, SUPPRELIN® LA, NASCOBAL® Nasal Spray, AVEED®, QWO®, PERCOCET®, TESTOPEL®, EDEX® and LIDODERM®, among others.
Sterile Injectables
Our Sterile Injectables segment consists primarily of branded sterile injectable products such as VASOSTRICT®, ADRENALIN® and APLISOL®, among others, and certain generic sterile injectable products, including ertapenem for injection (the authorized generic of Merck Sharp & Dohme Corp.’s (Merck) Invanz®) and ephedrine sulfate injection, among others.
Generic Pharmaceuticals
Our Generic Pharmaceuticals segment consists of a product portfolio including solid oral extended-release, solid oral immediate-release, liquids, semi-solids, patches, powders, ophthalmics and sprays and includes products that treat and manage a wide variety of medical conditions.
International Pharmaceuticals
Our International Pharmaceuticals segment includes a variety of specialty pharmaceutical products sold outside the U.S., primarily in Canada through our operating company Paladin Labs Inc. (Paladin). The key products of this segment serve various therapeutic areas, including attention deficit hyperactivity disorder, pain, women’s health, oncology and transplantation.
The following represents selected information for the Company’s reportable segments for the three months ended March 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, | | |
| | | | | 2022 | | 2021 | | |
Net revenues from external customers: | | | | | | | | | |
Branded Pharmaceuticals | | | | | $ | 204,861 | | | $ | 206,635 | | | |
Sterile Injectables | | | | | 240,028 | | | 308,745 | | | |
Generic Pharmaceuticals | | | | | 185,944 | | | 180,873 | | | |
International Pharmaceuticals (1) | | | | | 21,426 | | | 21,666 | | | |
Total net revenues from external customers | | | | | $ | 652,259 | | | $ | 717,919 | | | |
Segment adjusted income from continuing operations before income tax: | | | | | | | | | |
Branded Pharmaceuticals | | | | | $ | 77,666 | | | $ | 93,769 | | | |
Sterile Injectables | | | | | 191,254 | | | 242,639 | | | |
Generic Pharmaceuticals | | | | | 66,382 | | | 34,104 | | | |
International Pharmaceuticals | | | | | 4,381 | | | 7,471 | | | |
Total segment adjusted income from continuing operations before income tax | | | | | $ | 339,683 | | | $ | 377,983 | | | |
__________
(1)Revenues generated by our International Pharmaceuticals segment are primarily attributable to external customers located in Canada.
There were no material revenues from external customers attributed to an individual country outside of the U.S. during any of the periods presented.
The table below provides reconciliations of our Total consolidated (loss) income from continuing operations before income tax, which is determined in accordance with U.S. GAAP, to our Total segment adjusted income from continuing operations before income tax for the three months ended March 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, | | |
| | | | | 2022 | | 2021 | | |
Total consolidated (loss) income from continuing operations before income tax | | | | | $ | (67,115) | | | $ | 47,783 | | | |
Interest expense, net | | | | | 134,949 | | | 134,341 | | | |
Corporate unallocated costs (1) | | | | | 43,281 | | | 39,474 | | | |
Amortization of intangible assets | | | | | 90,234 | | | 95,130 | | | |
| | | | | | | | | |
Acquired in-process research and development charges | | | | | 2,900 | | | — | | | |
Amounts related to continuity and separation benefits, cost reductions and strategic review initiatives (2) | | | | | 57,649 | | | 23,720 | | | |
Certain litigation-related and other contingencies, net (3) | | | | | 25,154 | | | 637 | | | |
Certain legal costs (4) | | | | | 32,732 | | | 19,276 | | | |
Asset impairment charges (5) | | | | | 19,953 | | | 3,309 | | | |
Acquisition-related and integration items, net (6) | | | | | (1,377) | | | (5,022) | | | |
Loss on extinguishment of debt | | | | | — | | | 13,753 | | | |
| | | | | | | | | |
Foreign currency impact related to the remeasurement of intercompany debt instruments | | | | | 1,198 | | | 1,147 | | | |
Other, net (7) | | | | | 125 | | | 4,435 | | | |
Total segment adjusted income from continuing operations before income tax | | | | | $ | 339,683 | | | $ | 377,983 | | | |
__________
(1)Amounts include certain corporate overhead costs, such as headcount, facility and corporate litigation expenses and certain other income and expenses.
(2)Amounts for the three months ended March 31, 2022 include net employee separation, continuity and other benefit-related charges of $32.3 million, accelerated depreciation charges of $3.7 million and other net charges, including those related to strategic review initiatives, of $21.6 million. Amounts for the three months ended March 31, 2021 include net employee separation, continuity and other benefit-related charges of $8.5 million, accelerated depreciation charges of $6.9 million and other net charges, including those related to strategic review initiatives, of $8.3 million. These amounts relate primarily to our restructuring activities as further described in Note 4. Restructuring, certain continuity and transitional compensation arrangements, certain other cost reduction initiatives and certain strategic review initiatives.
(3)Amounts include adjustments to our accruals for litigation-related settlement charges and certain settlement proceeds related to suits filed by our subsidiaries. Our material legal proceedings and other contingent matters are described in more detail in Note 13. Commitments and Contingencies.
(4)Amounts relate to opioid-related legal expenses.
(5)Amounts primarily relate to charges to impair intangible assets. For additional information, refer to Note 9. Goodwill and Other Intangibles.
(6)Amounts primarily relate to changes in the fair value of contingent consideration.
(7)Amounts for the three months ended March 31, 2021 primarily relate to $3.9 million of third-party fees incurred in connection with the March 2021 Refinancing Transactions, which were accounted for as debt modification costs. Refer to Note 12. Debt for additional information. Other amounts in this row relate to gains and losses on sales of businesses and other assets and certain other items.
Asset information is not reviewed or included within our internal management reporting. Therefore, the Company has not disclosed asset information for each reportable segment.
During the three months ended March 31, 2022 and 2021, the Company disaggregated its revenue from contracts with customers into the categories included in the table below (in thousands). The Company believes these categories depict how the nature, timing and uncertainty of revenue and cash flows are affected by economic factors.
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, | | |
| | | | | 2022 | | 2021 | | |
Branded Pharmaceuticals: | | | | | | | | | |
Specialty Products: | | | | | | | | | |
XIAFLEX® | | | | | $ | 99,484 | | | $ | 95,270 | | | |
SUPPRELIN® LA | | | | | 28,830 | | | 28,028 | | | |
Other Specialty (1) | | | | | 20,744 | | | 20,032 | | | |
Total Specialty Products | | | | | $ | 149,058 | | | $ | 143,330 | | | |
Established Products: | | | | | | | | | |
PERCOCET® | | | | | $ | 26,175 | | | $ | 25,625 | | | |
TESTOPEL® | | | | | 8,880 | | | 11,189 | | | |
| | | | | | | | | |
Other Established (2) | | | | | 20,748 | | | 26,491 | | | |
Total Established Products | | | | | $ | 55,803 | | | $ | 63,305 | | | |
Total Branded Pharmaceuticals (3) | | | | | $ | 204,861 | | | $ | 206,635 | | | |
Sterile Injectables: | | | | | | | | | |
VASOSTRICT® | | | | | $ | 155,890 | | | $ | 223,946 | | | |
ADRENALIN® | | | | | 33,823 | | | 29,437 | | | |
| | | | | | | | | |
| | | | | | | | | |
Other Sterile Injectables (4) | | | | | 50,315 | | | 55,362 | | | |
Total Sterile Injectables (3) | | | | | $ | 240,028 | | | $ | 308,745 | | | |
Total Generic Pharmaceuticals (5) | | | | | $ | 185,944 | | | $ | 180,873 | | | |
Total International Pharmaceuticals (6) | | | | | $ | 21,426 | | | $ | 21,666 | | | |
Total revenues, net | | | | | $ | 652,259 | | | $ | 717,919 | | | |
__________
(1)Products included within Other Specialty include NASCOBAL® Nasal Spray, AVEED® and QWO®.
(2)Products included within Other Established include, but are not limited to, EDEX® and LIDODERM®.
(3)Individual products presented above represent the top two performing products in each product category for the three months ended March 31, 2022 and/or any product having revenues in excess of $25 million during any quarterly period in 2022 or 2021.
(4)Products included within Other Sterile Injectables include ertapenem for injection, APLISOL® and others.
(5)The Generic Pharmaceuticals segment is comprised of a portfolio of products that are generic versions of branded products, are distributed primarily through the same wholesalers, generally have no intellectual property protection and are sold within the U.S. During the three months ended March 31, 2022, varenicline tablets (our generic version of Pfizer Inc.’s Chantix®), which launched in September 2021, made up 10% of consolidated total revenues. No other individual product within this segment has exceeded 5% of consolidated total revenues for the periods presented.
(6)The International Pharmaceuticals segment, which accounted for less than 5% of consolidated total revenues for each of the periods presented, includes a variety of specialty pharmaceutical products sold outside the U.S., primarily in Canada through our operating company Paladin.
NOTE 6. FAIR VALUE MEASUREMENTS
Fair value guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
•Level 1—Quoted prices in active markets for identical assets or liabilities.
•Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
•Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Financial Instruments
The financial instruments recorded in our Condensed Consolidated Balance Sheets include cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, acquisition-related contingent consideration and debt obligations. Included in cash and cash equivalents and restricted cash and cash equivalents are money market funds representing a type of mutual fund required by law to invest in low-risk securities (for example, U.S. government bonds, U.S. Treasury Bills and commercial paper). Money market funds pay dividends that generally reflect short-term interest rates. Due to their initial maturities, the carrying amounts of non-restricted and restricted cash and cash equivalents (including money market funds), accounts receivable, accounts payable and accrued expenses approximate their fair values.
Restricted Cash and Cash Equivalents
Amounts reported as Restricted cash and cash equivalents in our Condensed Consolidated Balance Sheets at March 31, 2022 and December 31, 2021 include restricted cash and cash equivalents associated with litigation-related matters, including $136.4 million and $78.4 million, respectively, held in Qualified Settlement Funds (QSFs) for mesh- and opioid-related matters. See Note 13. Commitments and Contingencies for further information about litigation-related matters. Additionally, at both March 31, 2022 and December 31, 2021, approximately $45.0 million of restricted cash and cash equivalents related to certain insurance-related matters.
Acquisition-Related Contingent Consideration
The fair value of contingent consideration liabilities is determined using unobservable inputs; hence, these instruments represent Level 3 measurements within the above-defined fair value hierarchy. These inputs include the estimated amount and timing of projected cash flows, the probability of success (achievement of the contingent event) and the risk-adjusted discount rate used to present value the probability-weighted cash flows. Subsequent to the acquisition date, at each reporting period, the contingent consideration liability is remeasured at current fair value with changes recorded in earnings. The estimates of fair value are uncertain and changes in any of the estimated inputs used as of the date of this report could have resulted in significant adjustments to fair value. See the “Recurring Fair Value Measurements” section below for additional information on acquisition-related contingent consideration.
Recurring Fair Value Measurements
The Company’s financial assets and liabilities measured at fair value on a recurring basis at March 31, 2022 and December 31, 2021 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at March 31, 2022 using: |
| Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Total |
Assets: | | | | | | | |
Money market funds | $ | 15,079 | | | $ | — | | | $ | — | | | $ | 15,079 | |
Liabilities: | | | | | | | |
Acquisition-related contingent consideration—current | $ | — | | | $ | — | | | $ | 4,674 | | | $ | 4,674 | |
Acquisition-related contingent consideration—noncurrent | $ | — | | | $ | — | | | $ | 13,302 | | | $ | 13,302 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements at December 31, 2021 using: |
| Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Total |
Assets: | | | | | | | |
Money market funds | $ | 134,847 | | | $ | — | | | $ | — | | | $ | 134,847 | |
Liabilities: | | | | | | | |
Acquisition-related contingent consideration—current | $ | — | | | $ | — | | | $ | 5,748 | | | $ | 5,748 | |
Acquisition-related contingent consideration—noncurrent | $ | — | | | $ | — | | | $ | 14,328 | | | $ | 14,328 | |
At March 31, 2022 and December 31, 2021, money market funds include $15.1 million and $16.2 million, respectively, in QSFs to be disbursed to litigation claimants. Amounts in QSFs are considered restricted cash equivalents. See Note 13. Commitments and Contingencies for further discussion of our litigation. At March 31, 2022 and December 31, 2021, the differences between the amortized cost and the fair value of our money market funds were not material, individually or in the aggregate.
Fair Value Measurements Using Significant Unobservable Inputs
The following table presents changes to the Company’s liability for acquisition-related contingent consideration, which is measured at fair value on a recurring basis using significant unobservable inputs (Level 3), for the three months ended March 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2022 | | 2021 |
Beginning of period | | | | | $ | 20,076 | | | $ | 36,249 | |
Amounts settled | | | | | (802) | | | (1,151) | |
Changes in fair value recorded in earnings | | | | | (1,377) | | | (5,453) | |
Effect of currency translation | | | | | 79 | | | 118 | |
End of period | | | | | $ | 17,976 | | | $ | 29,763 | |
At March 31, 2022, the fair value measurements of the contingent consideration obligations were determined using risk-adjusted discount rates ranging from 10.0% to 15.0% (weighted average rate of approximately 10.6%, weighted based on relative fair value). Changes in fair value recorded in earnings related to acquisition-related contingent consideration are included in our Condensed Consolidated Statements of Operations as Acquisition-related and integration items, net. Amounts recorded for the current and noncurrent portions of acquisition-related contingent consideration are included in Accounts payable and accrued expenses and Other liabilities, respectively, in our Condensed Consolidated Balance Sheets.
The following table presents changes to the Company’s liability for acquisition-related contingent consideration during the three months ended March 31, 2022 by acquisition (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance as of December 31, 2021 | | | | Changes in Fair Value Recorded in Earnings | | Amounts Settled and Other | | Balance as of March 31, 2022 |
Auxilium acquisition | $ | 9,038 | | | | | $ | (235) | | | $ | — | | | $ | 8,803 | |
Lehigh Valley Technologies, Inc. acquisitions | 3,600 | | | | | (1,221) | | | (279) | | | 2,100 | |
| | | | | | | | | |
Other | 7,438 | | | | | 79 | | | (444) | | | 7,073 | |
Total | $ | 20,076 | | | | | $ | (1,377) | | | $ | (723) | | | $ | 17,976 | |
Nonrecurring Fair Value Measurements
The Company’s financial assets and liabilities measured at fair value on a nonrecurring basis during the three months ended March 31, 2022 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements during the Three Months Ended March 31, 2022 (1) using: | | Total Expense for the Three Months Ended March 31, 2022 |
| Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | |
| | | | | | | |
Intangible assets, excluding goodwill (2) | $ | — | | | $ | — | | | $ | 14,207 | | | $ | (19,953) | |
| | | | | | | |
| | | | | | | |
Total | $ | — | | | $ | — | | | $ | 14,207 | | | $ | (19,953) | |
__________
(1)The fair value amounts are presented as of the date of the fair value measurement as these assets are not measured at fair value on a recurring basis. Such measurements generally occur in connection with our quarter-end financial reporting close procedures.
(2)These fair value measurements were determined using risk-adjusted discount rates ranging from 9.5% to 11.0% (weighted average rate of approximately 10.8%, weighted based on relative fair value).
NOTE 7. INVENTORIES
Inventories consist of the following at March 31, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Raw materials (1) | $ | 96,832 | | | $ | 90,453 | |
Work-in-process (1) | 73,520 | | | 82,728 | |
Finished goods (1) | 113,474 | | | 110,371 | |
Total | $ | 283,826 | | | $ | 283,552 | |
__________
(1)The components of inventory shown in the table above are net of allowance for obsolescence.
Inventory that is in excess of the amount expected to be sold within one year is classified as noncurrent inventory and is not included in the table above. At March 31, 2022 and December 31, 2021, $22.7 million and $10.7 million, respectively, of noncurrent inventory was included in Other assets in the Condensed Consolidated Balance Sheets. As of March 31, 2022 and December 31, 2021, the Company’s Condensed Consolidated Balance Sheets included approximately $11.3 million and $12.2 million, respectively, of capitalized pre-launch inventories related to products that were not yet available to be sold.
NOTE 8. LEASES
The following table presents information about the Company’s right-of-use assets and lease liabilities at March 31, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | |
| Balance Sheet Line Items | | March 31, 2022 | | December 31, 2021 |
Right-of-use assets: | | | | | |
Operating lease right-of-use assets | Operating lease assets | | $ | 33,203 | | | $ | 34,832 | |
Finance lease right-of-use assets | Property, plant and equipment, net | | 36,054 | | | 38,365 | |
Total right-of-use assets | | $ | 69,257 | | | $ | 73,197 | |
Operating lease liabilities: | | | | | |
Current operating lease liabilities | Current portion of operating lease liabilities | | $ | 11,024 | | | $ | 10,992 | |
Noncurrent operating lease liabilities | Operating lease liabilities, less current portion | | 31,688 | | | 33,727 | |
Total operating lease liabilities | | $ | 42,712 | | | $ | 44,719 | |
Finance lease liabilities: | | | | | |
Current finance lease liabilities | Accounts payable and accrued expenses | | $ | 7,004 | | | $ | 6,841 | |
Noncurrent finance lease liabilities | Other liabilities | | 16,510 | | | 18,374 | |
Total finance lease liabilities | | $ | 23,514 | | | $ | 25,215 | |
The following table presents information about lease costs and expenses and sublease income for the three months ended March 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended March 31, | | |
| Statement of Operations Line Items | | | | | | 2022 | | 2021 | | |
Operating lease cost | Various (1) | | | | | | $ | 2,726 | | | $ | 3,736 | | | |
Finance lease cost: | | | | | | | | | | | |
Amortization of right-of-use assets | Various (1) | | | | | | $ | 2,311 | | | $ | 2,311 | | | |
Interest on lease liabilities | Interest expense, net | | | | | | $ | 253 | | | $ | 367 | | | |
Other lease costs and income: | | | | | | | | | | | |
Variable lease costs (2) | Various (1) | | | | | | $ | 2,507 | | | $ | 3,022 | | | |
| | | | | | | | | | | |
Sublease income | Various (1) | | | | | | $ | (1,840) | | | $ | (933) | | | |
__________
(1)Amounts are included in the Condensed Consolidated Statements of Operations based on the function that the underlying leased asset supports. The following table presents the components of such aggregate amounts for the three months ended March 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, | | |
| | | | | 2022 | | 2021 | | |
Cost of revenues | | | | | $ | 1,606 | | | $ | 3,058 | | | |
Selling, general and administrative | | | | | $ | 4,044 | | | $ | 5,024 | | | |
Research and development | | | | | $ | 54 | | | $ | 54 | | | |
(2)Amounts represent variable lease costs incurred that were not included in the initial measurement of the lease liability such as common area maintenance and utilities costs associated with leased real estate and certain costs associated with our automobile leases.
The following table provides certain cash flow and supplemental noncash information related to our lease liabilities for the three months ended March 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2022 | | 2021 | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | |
Operating cash payments for operating leases | $ | 2,943 | | | $ | 2,883 | | | |
Operating cash payments for finance leases | $ | 437 | | | $ | 548 | | | |
Financing cash payments for finance leases | $ | 1,470 | | | $ | 1,321 | | | |
| | | | | |
| | | | | |
| | | | | |
NOTE 9. GOODWILL AND OTHER INTANGIBLES
Goodwill
The following table presents information about our goodwill at March 31, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Branded Pharmaceuticals | | Sterile Injectables | | Generic Pharmaceuticals | | International Pharmaceuticals | | Total |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Goodwill as of December 31, 2021 | $ | 828,818 | | | $ | 2,368,193 | | | $ | — | | | $ | — | | | $ | 3,197,011 | |
| | | | | | | | | |
| | | | | | | | | |
Goodwill as of March 31, 2022 | $ | 828,818 | | | $ | 2,368,193 | | | $ | — | | | $ | — | | | $ | 3,197,011 | |
The carrying amounts of goodwill at March 31, 2022 and December 31, 2021 are net of the following accumulated impairments (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Branded Pharmaceuticals | | Sterile Injectables | | Generic Pharmaceuticals | | International Pharmaceuticals | | Total |
Accumulated impairment losses as of December 31, 2021 | $ | 855,810 | | | $ | 363,000 | | | $ | 3,142,657 | | | $ | 550,355 | | | $ | 4,911,822 | |
Accumulated impairment losses as of March 31, 2022 | $ | 855,810 | | | $ | 363,000 | | | $ | 3,142,657 | | | $ | 556,129 | | | $ | 4,917,596 | |
Other Intangible Assets
Changes in the amounts of other intangible assets for the three months ended March 31, 2022 are set forth in the table below (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cost basis: | Balance as of December 31, 2021 | | Acquisitions | | Impairments | | | | Effect of Currency Translation | | Balance as of March 31, 2022 |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Licenses (weighted average life of 14 years) | $ | 442,107 | | | $ | — | | | $ | — | | | | | $ | — | | | $ | 442,107 | |
Tradenames | 6,409 | | | — | | | — | | | | | — | | | 6,409 | |
Developed technology (weighted average life of 12 years) | 6,226,139 | | | — | | | (19,953) | | | | | 2,701 | | | 6,208,887 | |
| | | | | | | | | | | |
Total other intangibles (weighted average life of 12 years years) | $ | 6,674,655 | | | $ | — | | | $ | (19,953) | | | | | $ | 2,701 | | | $ | 6,657,403 | |
| | | | | | | | | | | |
Accumulated amortization: | Balance as of December 31, 2021 | | Amortization | | Impairments | | | | Effect of Currency Translation | | Balance as of March 31, 2022 |
| | | | | | | | | | | |
Licenses | $ | (419,932) | | | $ | (1,144) | | | $ | — | | | | | $ | — | | | $ | (421,076) | |
Tradenames | (6,409) | | | — | | | — | | | | | — | | | (6,409) | |
Developed technology | (3,885,491) | | | (89,090) | | | — | | | | | (2,066) | | | (3,976,647) | |
Total other intangibles | $ | (4,311,832) | | | $ | (90,234) | | | $ | — | | | | | $ | (2,066) | | | $ | (4,404,132) | |
Net other intangibles | $ | 2,362,823 | | | | | | | | | | | $ | 2,253,271 | |
Amortization expense for the three months ended March 31, 2022 and 2021 totaled $90.2 million and $95.1 million, respectively. Amortization expense is included in Cost of revenues in the Condensed Consolidated Statements of Operations.
Impairments
Goodwill and, if applicable, indefinite-lived intangible assets are tested for impairment annually and when events or changes in circumstances indicate that the asset might be impaired. Our annual assessment is performed as of October 1.
As part of our goodwill and intangible asset impairment assessments, we estimate the fair values of our reporting units and our intangible assets using an income approach that utilizes a discounted cash flow model or, where appropriate, a market approach.
The discounted cash flow models are dependent upon our estimates of future cash flows and other factors including estimates of (i) future operating performance, including future sales, long-term growth rates, gross margins, operating expenses, discount rate and the probability of achieving the estimated cash flows and (ii) future economic conditions. These assumptions are based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value hierarchy. The discount rates applied to the estimated cash flows are determined depending on the overall risk associated with the particular assets and other market factors. We believe the discount rates and other inputs and assumptions are consistent with those that a market participant would use. Any impairment charges resulting from annual or interim goodwill and intangible asset impairment assessments are recorded to Asset impairment charges in our Condensed Consolidated Statements of Operations.
During the three months ended March 31, 2022 and 2021, we incurred asset impairment charges of $20.0 million and $2.9 million, respectively, associated with other intangible assets and we did not record any goodwill impairment charges. These pre-tax non-cash asset impairment charges related primarily to certain developed technology intangible assets that were tested for impairment following changes in market conditions and certain other factors impacting recoverability.
NOTE 10. CONTRACT ASSETS AND LIABILITIES
Our revenue consists almost entirely of sales of our products to customers, whereby we ship products to a customer pursuant to a purchase order. Revenue contracts such as these do not generally give rise to contract assets or contract liabilities because: (i) the underlying contracts generally have only a single performance obligation and (ii) we do not generally receive consideration until the performance obligation is fully satisfied. At March 31, 2022, the unfulfilled performance obligations for these types of contracts relate to ordered but undelivered products. We generally expect to fulfill the performance obligations and recognize revenue within one week of entering into the underlying contract. Based on the short-term initial contract duration, additional disclosure about the remaining performance obligations is not required.
Certain of our other revenue-generating contracts, including license and collaboration agreements, may result in contract assets and/or contract liabilities. For example, we may recognize contract liabilities upon receipt of certain upfront and milestone payments from customers when there are remaining performance obligations.
The following table shows the opening and closing balances of contract assets and contract liabilities from contracts with customers (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 | | $ Change | | % Change |
Contract assets, net (1) | $ | 12,925 | | | $ | 13,005 | | | $ | (80) | | | (1) | % |
Contract liabilities, net (2) | $ | 4,522 | | | $ | 4,663 | | | $ | (141) | | | (3) | % |
__________
(1)At March 31, 2022 and December 31, 2021, approximately $3.0 million and $2.8 million, respectively, of these contract asset amounts are classified as current and are included in Prepaid expenses and other current assets in the Company’s Condensed Consolidated Balance Sheets. The remaining amounts are classified as noncurrent and are included in Other assets.
(2)At March 31, 2022 and December 31, 2021, approximately $0.6 million and $0.6 million, respectively, of these contract liability amounts are classified as current and are included in Accounts payable and accrued expenses in the Company’s Condensed Consolidated Balance Sheets. The remaining amounts are classified as noncurrent and are included in Other liabilities. During the three months ended March 31, 2022, approximately $0.1 million of revenue was recognized that was included in the contract liability balance at December 31, 2021.
During the three months ended March 31, 2022, we recognized revenue of $1.3 million relating to performance obligations satisfied, or partially satisfied, in prior periods. Such revenue generally relates to changes in estimates with respect to our variable consideration.
NOTE 11. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses include the following at March 31, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Trade accounts payable | $ | 101,007 | | | $ | 123,129 | |
Returns and allowances | 179,649 | | | 183,116 | |
Rebates | 135,115 | | | 150,039 | |
Chargebacks | 2,516 | | | 2,617 | |
Other sales deductions | 2,358 | | | 2,500 | |
Accrued interest | 159,363 | | | 106,735 | |
Accrued payroll and related benefits | 81,252 | | | 90,029 | |
Accrued royalties and other distribution partner payables | 34,176 | | | 58,422 | |
Acquisition-related contingent consideration—current | 4,674 | | | 5,748 | |
Other | 108,168 | | | 114,563 | |
Total | $ | 808,278 | | | $ | 836,898 | |
NOTE 12. DEBT
The following table presents information about the Company’s total indebtedness at March 31, 2022 and December 31, 2021 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
| Effective Interest Rate | | Principal Amount | | Carrying Amount | | Effective Interest Rate | | Principal Amount | | Carrying Amount |
7.25% Senior Notes due 2022 | | | $ | — | | | $ | — | | | 7.25 | % | | $ | 8,294 | | | $ | 8,294 | |
5.75% Senior Notes due 2022 | | | — | | | — | | | 5.75 | % | | 172,048 | | | 172,048 | |
5.375% Senior Notes due 2023 | 5.62 | % | | 6,127 | | | 6,116 | | | 5.62 | % | | 6,127 | | | 6,111 | |
6.00% Senior Notes due 2023 | 6.28 | % | | 56,436 | | | 56,239 | | | 6.28 | % | | 56,436 | | | 56,203 | |
5.875% Senior Secured Notes due 2024 | 6.14 | % | | 300,000 | | | 298,099 | | | 6.14 | % | | 300,000 | | | 297,928 | |
6.00% Senior Notes due 2025 | 6.27 | % | | 21,578 | | | 21,425 | | | 6.27 | % | | 21,578 | | | 21,413 | |
7.50% Senior Secured Notes due 2027 | 7.70 | % | | 2,015,479 | | | 1,998,469 | | | 7.70 | % | | 2,015,479 | | | 1,997,777 | |
9.50% Senior Secured Second Lien Notes due 2027 | 9.68 | % | | 940,590 | | | 933,579 | | | 9.68 | % | | 940,590 | | | 933,330 | |
6.00% Senior Notes due 2028 | 6.11 | % | | 1,260,416 | | | 1,252,911 | | | 6.11 | % | | 1,260,416 | | | 1,252,667 | |
6.125% Senior Secured Notes due 2029 | 6.34 | % | | 1,295,000 | | | 1,279,165 | | | 6.34 | % | | 1,295,000 | | | 1,278,718 | |
Term Loan Facility | 6.12 | % | | 1,980,000 | | | 1,943,905 | | | 6.12 | % | | 1,985,000 | | | 1,947,633 | |
Revolving Credit Facility | 2.75 | % | | 277,200 | | | 277,200 | | | 2.63 | % | | 277,200 | | | 277,200 | |
| | | | | | | | | | | |
Total long-term debt, net | | | $ | 8,152,826 | | | $ | 8,067,108 | | | | | $ | 8,338,168 | | | $ | 8,249,322 | |
Less: current portion, net | | | 26,127 | | | 26,116 | | | | | 200,342 | | | 200,342 | |
Total long-term debt, less current portion, net | | | $ | 8,126,699 | | | $ | 8,040,992 | | | | | $ | 8,137,826 | | | $ | 8,048,980 | |
The Company and its subsidiaries, with certain customary exceptions, guarantee or serve as issuers or borrowers of the debt instruments representing substantially all of the Company’s indebtedness at March 31, 2022. The obligations under (i) the 5.875% Senior Secured Notes due 2024, (ii) the 7.50% Senior Secured Notes due 2027, (iii) the 6.125% Senior Secured Notes due 2029 and (iv) the Credit Agreement (as defined below) and related loan documents are secured on a pari passu basis by a first priority lien (subject to certain permitted liens) on the collateral securing such instruments, which collateral represents substantially all of the assets of the issuers or borrowers and the guarantors party thereto (subject to customary exceptions). The obligations under the 9.50% Senior Secured Second Lien Notes due 2027 are secured by a second priority lien (subject to certain permitted liens) on, and on a junior basis with respect to, the collateral securing the obligations under the Credit Agreement, the 5.875% Senior Secured Notes due 2024, the 7.50% Senior Secured Notes due 2027 and the 6.125% Senior Secured Notes due 2029 and the related guarantees. Our senior unsecured notes are unsecured and effectively subordinated in right of priority to the obligations under the Credit Agreement, the 5.875% Senior Secured Notes due 2024, the 7.50% Senior Secured Notes due 2027, the 9.50% Senior Secured Second Lien Notes due 2027 and the 6.125% Senior Secured Notes due 2029, in each case to the extent of the value of the collateral securing such instruments.
The aggregate estimated fair value of the Company’s long-term debt, which was estimated using inputs based on quoted market prices for the same or similar debt issuances, was $7.1 billion and $8.0 billion at March 31, 2022 and December 31, 2021, respectively. Based on this valuation methodology, we determined these debt instruments represent Level 2 measurements within the fair value hierarchy.
Credit Facilities
The Company and certain of its subsidiaries are party to the Credit Agreement, which, immediately following the March 2021 Refinancing Transactions (as defined and further described below) provided for (i) a $1,000.0 million senior secured revolving credit facility (the Revolving Credit Facility) and (ii) a $2,000.0 million senior secured term loan facility (the Term Loan Facility and, together with the Revolving Credit Facility, the Credit Facilities). Current amounts outstanding as of March 31, 2022 under the Credit Facilities are set forth in the table above. As of March 31, 2022, $76.0 million of commitments under the Revolving Credit Facility have matured and $924.0 million of commitments remain outstanding under the Revolving Credit Facility. After giving effect to net borrowings under the Revolving Credit Facility and issued and outstanding letters of credit, approximately $639.9 million of remaining credit is available under the Revolving Credit Facility as of March 31, 2022. Additionally, the Company’s outstanding debt agreements contain a number of restrictive covenants, including certain limitations on the Company’s ability to incur additional indebtedness.
As of March 31, 2022 and December 31, 2021, we were in compliance with all covenants contained in the Credit Agreement.
Senior Notes and Senior Secured Notes
As of March 31, 2022 and December 31, 2021, we were in compliance with all covenants contained in the indentures governing our various senior notes and senior secured notes.
Debt Financing Transactions
Set forth below are certain disclosures relating to debt financing transactions that occurred during the three months ended March 31, 2022 or the year ended December 31, 2021. For additional disclosures relating to debt financing transactions that occurred during the year ended December 31, 2021, refer to Note 15. Debt in the Consolidated Financial Statements included in Part IV, Item 15 of the Annual Report.
March 2021 Refinancing
In March 2021, the Company executed certain transactions (the March 2021 Refinancing Transactions) that included:
•refinancing in full its previously-existing term loans, which had approximately $3,295.5 million of principal outstanding immediately before refinancing (the Existing Term Loans), with the proceeds from: (i) a new $2,000.0 million term loan (the Term Loan Facility) and (ii) $1,295.0 million of newly issued 6.125% Senior Secured Notes due 2029 (collectively, the Term Loan Refinancing);
•extending the maturity of approximately $675.3 million of existing revolving commitments under the Revolving Credit Facility to March 2026; and
•making certain other modifications to the credit agreement that was in effect immediately prior to the March 2021 Refinancing Transactions (the Prior Credit Agreement).
The changes to the Credit Facilities and the Prior Credit Agreement were effected pursuant to an amendment and restatement agreement entered into by the Company in March 2021 (the Restatement Agreement), which amended and restated the Prior Credit Agreement (as amended and restated by the Restatement Agreement, the Credit Agreement), among Endo International plc, certain of its subsidiaries, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent, issuing bank and swingline lender.
The $2,000.0 million portion of the Term Loan Refinancing associated with the new term loan was accounted for as a debt modification, while the $1,295.0 million portion associated with the new notes issued was accounted for as an extinguishment. During the first quarter of 2021, in connection with the Term Loan Refinancing, $7.8 million of deferred and unamortized costs associated with the Existing Term Loans, representing the portion associated with the extinguishment, was charged to expense and is included in the Loss on extinguishment of debt line item in the Condensed Consolidated Statements of Operations. The Company also incurred an additional $56.7 million of new costs and fees, of which: (i) $29.2 million and $17.6 million have been deferred to be amortized as interest expense over the terms of the Term Loan Facility and the newly issued 6.125% Senior Secured Notes due 2029, respectively; (ii) $6.0 million was considered debt extinguishment costs and was charged to expense in the first quarter of 2021 and is included in the Loss on extinguishment of debt line item in the Condensed Consolidated Statements of Operations; and (iii) $3.9 million was considered debt modification costs and was charged to expense in the first quarter of 2021 and is included in the Selling, general and administrative expense line item in the Condensed Consolidated Statements of Operations.
During the first quarter of 2021, the Company also incurred $2.1 million of new costs and fees associated with the extension of the Revolving Credit Facility, which have been deferred and are being amortized as interest expense over the new term of the Revolving Credit Facility.
October 2021 Revolving Credit Facility Repayment and January 2022 Senior Notes Repayments
In October 2021, commitments under the Revolving Credit Facility of approximately $76.0 million matured, thereby reducing the remaining commitments outstanding under the Revolving Credit Facility. This maturity, which reduced the remaining credit available under the Revolving Credit Facility, occurred because the 7.25% Senior Notes due 2022 and the 5.75% Senior Notes due 2022 were not refinanced or repaid in full prior to the date that was 91 days prior to their January 15, 2022 maturity dates. As a result of this maturity, the Company repaid approximately $22.8 million of borrowings in October 2021, representing the amount that had been borrowed pursuant to these matured commitments. The 7.25% Senior Notes due 2022 and the 5.75% Senior Notes due 2022 were repaid in January 2022.
NOTE 13. COMMITMENTS AND CONTINGENCIES
Legal Proceedings and Investigations
We and certain of our subsidiaries are involved in various claims, legal proceedings and internal and governmental investigations (collectively, proceedings) arising from time to time, including, among others, those relating to product liability, intellectual property, regulatory compliance, consumer protection, tax and commercial matters. While we cannot predict the outcome of these proceedings and we intend to vigorously prosecute or defend our position as appropriate, there can be no assurance that we will be successful or obtain any requested relief. An adverse outcome in any of these proceedings could have a material adverse effect on our business, financial condition, results of operations and cash flows. We are subject to a number of matters that are not being disclosed herein because, in the opinion of our management, these matters are immaterial both individually and in the aggregate with respect to our financial position, results of operations and cash flows.
We believe that certain settlements and judgments, as well as legal defense costs, relating to certain product liability or other matters are or may be covered in whole or in part under our insurance policies with a number of insurance carriers. In certain circumstances, insurance carriers reserve their rights to contest or deny coverage. We intend to contest vigorously any disputes with our insurance carriers and to enforce our rights under the terms of our insurance policies. Accordingly, we will record receivables with respect to amounts due under these policies only when the realization of the potential claim for recovery is considered probable.
Notwithstanding the foregoing, amounts recovered under our insurance policies could be materially less than stated coverage limits and may not be adequate to cover damages, other relief and/or costs relating to claims. In addition, there is no guarantee that insurers will pay claims in the amounts we expect or that coverage will otherwise be available. We may not have and may be unable to obtain or maintain insurance on acceptable terms or with adequate coverage against potential liabilities or other losses, including costs, judgments, settlements and other liabilities incurred in connection with current or future legal proceedings, regardless of the success or failure of the claim. For example, we do not have insurance sufficient to satisfy all of the opioid claims that have been made against us and, should we suffer an adverse judgment, appeal and similar bonds may not be available in such amounts as may be necessary to further challenge all or part of such judgment. We also generally no longer have product liability insurance to cover claims in connection with the mesh-related litigation described herein. Additionally, we may be limited by the surviving insurance policies of acquired entities, which may not be adequate to cover potential liabilities or other losses. Even where claims are submitted to insurance carriers for defense and indemnity, there can be no assurance that the claims will be covered by insurance or that the indemnitors or insurers will remain financially viable or will not challenge our right to reimbursement in whole or in part. The failure to generate sufficient cash flow or to obtain other financing could affect our ability to pay the amounts due under those liabilities not covered by insurance. Additionally, the nature of our business, the legal proceedings to which we are exposed and any losses we suffer may increase the cost of insurance, which could impact our decisions regarding our insurance programs.
As a result of the possibility or occurrence of an unfavorable outcome with respect to any legal proceeding, we have engaged in and, at any given time, may further engage in strategic reviews of all or a portion of our business. Any such review or contingency planning could ultimately result in our pursuing one or more significant corporate transactions or other remedial measures, including on a preventative or proactive basis. Actions that may be evaluated or pursued could include reorganization or restructuring activities of all or a portion of our business, asset sales or other divestitures, cost-saving initiatives or other corporate realignments, seeking strategic partnerships and exiting certain product or geographic markets. Some of these actions could take significant time to implement and others may require judicial or other third-party approval. As further described below, thousands of governmental persons and entities and private plaintiffs have filed suit against us and/or certain of our subsidiaries alleging opioid-related claims. We have not been able to settle most of the opioid claims made against us and, as a result, we are exploring a wide array of potential actions as part of our contingency planning. These actions could include a bankruptcy filing which, if it were to occur, would subject us to additional risks and uncertainties that could adversely affect our business prospects and ability to continue as a going concern, including, but not limited to, by causing increased difficulty obtaining and maintaining commercial relationships on competitive terms with customers, suppliers and other counterparts; increased difficulty retaining and motivating key employees, as well as attracting new employees; diversion of management’s time and attention to dealing with bankruptcy and restructuring activities rather than focusing exclusively on business operations; incurrence of substantial costs, fees and other expenses associated with bankruptcy proceedings; and loss of ability to maintain or obtain sufficient financing sources for operations or to fund any reorganization plan and meet future obligations. We would, in that event, also be subject to risks and uncertainties caused by the actions of creditors and other third parties with interests that may be inconsistent with our plans. Certain of these risks and uncertainties could also occur if our suppliers or other third parties believe that we may pursue one or more significant corporate transactions or other remedial measures.
As of March 31, 2022, our accrual for loss contingencies totaled $533.5 million, the most significant components of which relate to: (i) product liability and related matters associated with transvaginal surgical mesh products, which we have not sold since March 2016 and (ii) various opioid-related matters as further described herein. Although we believe there is a possibility that a loss in excess of the amount recognized exists, we are unable to estimate the possible loss or range of loss in excess of the amount recognized at this time. As of March 31, 2022, $528.5 million of our accrual for loss contingencies is classified in the Current portion of legal settlement accrual in the Condensed Consolidated Balance Sheets, with the remainder classified as Long-term legal settlement accrual, less current portion. The timing of the resolution of certain of these matters remains uncertain.
Vaginal Mesh Matters
Since 2008, we and certain of our subsidiaries, including American Medical Systems Holdings, Inc. (AMS) (subsequently converted to Astora Women’s Health Holding LLC and merged into Astora Women’s Health LLC and referred to herein as AMS and/or Astora), have been named as defendants in multiple lawsuits in various state and federal courts in the U.S., Canada, Australia and other countries, alleging personal injury resulting from the use of transvaginal surgical mesh products designed to treat pelvic organ prolapse (POP) and stress urinary incontinence (SUI). We have not sold such products since March 2016. Plaintiffs claim a variety of personal injuries, including chronic pain, incontinence, inability to control bowel function and permanent deformities, and seek compensatory and punitive damages, where available.
Various Master Settlement Agreements (MSAs) and other agreements have resolved approximately 71,000 filed and unfiled U.S. mesh claims as of March 31, 2022. These MSAs and other agreements were entered into at various times between June 2013 and the present, were solely by way of compromise and settlement and were not an admission of liability or fault by us or any of our subsidiaries. All MSAs are subject to a process that includes guidelines and procedures for administering the settlements and the release of funds. In certain cases, the MSAs provide for the creation of QSFs into which the settlement funds will be deposited, establish participation requirements and allow for a reduction of the total settlement payment in the event participation thresholds are not met. Funds deposited in QSFs are considered restricted cash and/or restricted cash equivalents. Distribution of funds to any individual claimant is conditioned upon the receipt of documentation substantiating product use, the dismissal of any lawsuit and the release of the claim as to us and all affiliates. Prior to receiving funds, an individual claimant must represent and warrant that liens, assignment rights or other claims identified in the claims administration process have been or will be satisfied by the individual claimant. Confidentiality provisions apply to the settlement funds, amounts allocated to individual claimants and other terms of the agreements.
The following table presents the changes in the mesh-related QSFs and liability accrual balances during the three months ended March 31, 2022 (in thousands):
| | | | | | | | | | | |
| Mesh Qualified Settlement Funds | | Mesh Liability Accrual |
Balance as of December 31, 2021 | $ | 78,402 | | | $ | 258,137 | |
Additional charges | — | | | — | |
Cash contributions to Qualified Settlement Funds, net | — | | | — | |
Cash distributions to settle disputes from Qualified Settlement Funds | (4,978) | | | (4,978) | |
Other cash distributions to settle disputes | — | | | (2,674) | |
Other (1) | 1 | | | 590 | |
Balance as of March 31, 2022 | $ | 73,425 | | | $ | 251,075 | |
__________
(1)Amounts deposited in the QSFs may earn interest, which is generally used to pay administrative costs of the funds and is reflected in the table above as an increase to the QSF and Mesh Liability Accrual balances. Any interest remaining after all claims have been paid will generally be distributed to the claimants who participated in that settlement. Also included within this line are foreign currency adjustments for settlements not denominated in U.S. dollars.
Charges related to vaginal mesh liability and associated legal fees and other expenses for all periods presented are reported in Discontinued operations, net of tax in our Condensed Consolidated Statements of Operations.
As of March 31, 2022, the Company has made total cumulative mesh liability payments of approximately $3.6 billion, $73.4 million of which remains in the QSFs as of March 31, 2022. We currently expect to fund all of the remaining payments under all previously executed mesh settlement agreements within the next 12 months. As funds are disbursed out of the QSFs from time to time, the liability accrual will be reduced accordingly with a corresponding reduction to restricted cash and cash equivalents.
In addition, we may pay cash distributions to settle disputes separate from the QSFs, which will also decrease the liability accrual and decrease cash and cash equivalents.
We were contacted in October 2012 regarding a civil investigation initiated by various U.S. state attorneys general into mesh products, including transvaginal surgical mesh products designed to treat POP and SUI. In November 2013, we received a subpoena relating to this investigation from the state of California, and we subsequently received additional subpoenas from California and other states. We are cooperating with the investigations.
We will continue to vigorously defend any unresolved claims and to explore other options as appropriate in our best interests. The next trial is currently scheduled to begin in September 2022. Trials may occur earlier or later than currently scheduled, as timing remains uncertain due to the impact of COVID-19 and other factors.
Similar matters may be brought by others or the foregoing matters may be expanded. We are unable to predict the outcome of these matters or to estimate the possible range of any additional losses that could be incurred.
Although the Company believes it has appropriately estimated the probable total amount of loss associated with all mesh-related matters as of the date of this report, litigation is ongoing in certain cases that have not settled, and it is reasonably possible that further claims may be filed or asserted and that adjustments to our overall liability accrual may be required. This could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Opioid-Related Matters
Since 2014, multiple U.S. states as well as other governmental persons or entities and private plaintiffs in the U.S. and Canada have filed suit against us and/or certain of our subsidiaries, including Endo Health Solutions Inc. (EHSI), Endo Pharmaceuticals Inc. (EPI), Par Pharmaceutical, Inc. (PPI), Par Pharmaceutical Companies, Inc. (PPCI), Endo Generics Holdings, Inc. (EGHI), Vintage Pharmaceuticals, LLC, Generics Bidco I, LLC, DAVA Pharmaceuticals, LLC, Par Sterile Products, LLC (PSP LLC) and in Canada, Paladin and Endo Ventures Limited, as well as various other manufacturers, distributors, pharmacies and/or others, asserting claims relating to the defendants’ alleged sales, marketing and/or distribution practices with respect to prescription opioid medications, including certain of our products. As of April 28, 2022, filed cases in the U.S. of which we were aware include, but are not limited to, approximately 20 cases filed by or on behalf of states; approximately 2,925 cases filed by counties, cities, Native American tribes and/or other government-related persons or entities; approximately 310 cases filed by hospitals, health systems, unions, health and welfare funds or other third-party payers and approximately 215 cases filed by individuals, including but not limited to legal guardians of children born with neonatal abstinence syndrome. Certain of the U.S. cases have been filed as putative class actions; to date, however, no court has certified a litigation class. The Canadian cases include an action filed by British Columbia on behalf of a proposed class of all federal, provincial and territorial governments and agencies in Canada that paid healthcare, pharmaceutical and treatment costs related to opioids; an action filed in Alberta by the City of Grand Prairie, Alberta, and The Corporation of the City of Brantford, Ontario, on behalf of a proposed class of all local or municipal governments in Canada; an action filed in Saskatchewan by the Peter Ballantyne Cree Nation and the Lac La Ronge Indian Band, on behalf of a proposed class of all First Nations communities and local or municipal governments in Canada; and five additional putative class actions, filed in British Columbia, Manitoba, Ontario and Quebec, seeking relief on behalf of Canadian residents who were prescribed and/or consumed opioid medications.
The complaints in the cases assert a variety of claims, including but not limited to statutory claims asserting violations of public nuisance, consumer protection, unfair trade practices, racketeering, Medicaid fraud and/or drug dealer liability laws and/or common law claims for public nuisance, fraud/misrepresentation, strict liability, negligence and/or unjust enrichment. The claims are generally based on alleged misrepresentations and/or omissions in connection with the sale and marketing of prescription opioid medications and/or alleged failures to take adequate steps to identify and report suspicious orders and to prevent abuse and diversion. Plaintiffs have sought various remedies including, without limitation, declaratory and/or injunctive relief; compensatory, punitive and/or treble damages; restitution, disgorgement, civil penalties, abatement, attorneys’ fees, costs and/or other relief. The damages sought exceed our applicable insurance.
Many of the U.S. cases have been coordinated in a federal multidistrict litigation (MDL) pending in the U.S. District Court for the Northern District of Ohio; however, in April 2022, the Judicial Panel on Multidistrict Litigation issued an order suggesting that, based on the progress of the MDL, it would no longer transfer new cases filed in or removed to federal court to the MDL. Other cases are pending in various federal or state courts. A case in Superior Court in Orange County, California, People of the State of California v. Purdue Pharma L.P., et al., has been tried to verdict. The plaintiffs in the case, Orange, Santa Clara and Los Angeles Counties and the City of Oakland, asserted claims against EPI and EHSI, among others, for public nuisance, alleged violations of California’s Unfair Competition Law and alleged violations of California’s False Advertising Law. Following a bench trial on liability, the court issued a final decision in defendants’ favor on all counts in December 2021. The plaintiffs filed a notice of appeal in February 2022. Other opioid-related cases are at various stages in the litigation process. Some cases are at the pleading or discovery stage; others are approaching the trial stage. Certain cases have been stayed pending settlement discussions; excluding such cases the next trial is currently set to begin in early 2023. Trials may occur earlier or later than currently scheduled, as timing remains uncertain due to the impact of COVID-19 and other factors.
In September 2019, EPI, EHSI, PPI and PPCI received subpoenas from the New York State Department of Financial Services (DFS) seeking documents and information regarding the marketing, sale and distribution of opioid medications in New York. In June 2020, DFS commenced an administrative action against the Company, EPI, EHSI, PPI and PPCI alleging violations of the New York Insurance Law and New York Financial Services Law. In July 2021, DFS filed an amended statement of charges. The amended statement of charges alleges that fraudulent or otherwise wrongful conduct in the marketing, sale and/or distribution of opioid medications caused false claims to be submitted to insurers and seeks civil penalties for each allegedly fraudulent prescription as well as injunctive relief. In July 2021, EPI, EHSI, PPI and PPCI, among others, filed a petition for judgment in New York state court seeking to prohibit DFS from proceeding with its administrative enforcement action. In December 2021, DFS filed a motion to dismiss that proceeding, which remains pending.
In February 2022, the court in Dunaway, et al. v. Purdue Pharma, L.P., et al. (now known as Bedford County, et al. v. AmerisourceBergen Drug Corp., et al.), a case pending in the Circuit Court for Cumberland County, Tennessee, entered an order imposing certain sanctions, including a default judgment on liability, against EPI and EHSI based on alleged discovery improprieties in a different case which EPI and EHSI had settled in August 2021. Because discovery in the earlier case had also been provided to the Dunaway plaintiffs, the Dunaway court deemed the alleged discovery improprieties to have occurred in Dunaway as well. The sanctions order also severed EPI and EHSI from the remaining defendants and set a damages trial to begin in April 2023. In a separate order, the Dunaway court denied a motion by EPI and EHSI to disqualify the judge based on, among other things, statements he made about the lawsuit to the press and on Facebook. In March 2022, EPI and EHSI appealed both orders. In April 2022, the Tennessee Court of Appeals, ruling on the appeal of the disqualification order, reversed the trial court’s order denying disqualification, vacated the sanctions order and remanded the case for reassignment to a different judge. It also denied the separate appeal of the sanctions order as moot.
Since 2019, the Company and/or certain of its subsidiaries have executed a number of settlement agreements to resolve governmental opioid claims brought by certain states, counties, cities and/or other governmental entities. Certain related developments include but are not limited the following:
•In September 2019, EPI, EHSI, PPI and PPCI executed a settlement agreement with two Ohio counties providing for payments totaling $10 million and up to $1 million of VASOSTRICT® and/or ADRENALIN®.
•In January 2020, EPI and PPI executed a settlement agreement with the state of Oklahoma providing for a payment of $8.75 million.
•In August 2021, EPI, EHSI, nine counties in eastern Tennessee, eighteen municipalities within those counties and a minor individual executed a settlement agreement providing for a payment of $35 million.
•In September 2021, Endo International plc, EPI, EHSI, PPI and PPCI executed a settlement agreement with the state of New York and two of its counties providing for a payment of $50 million.
•In October 2021, EPI and EHSI executed a settlement agreement with the Alabama Attorney General’s office intended to resolve opioid-related cases and claims of the state and other Alabama governmental persons and entities in exchange for a total payment of $25 million.
•In December 2021, Endo International plc, EPI, EHSI, PPI and PPCI executed a settlement agreement with the Texas Attorney General’s office and four Texas counties intended to resolve opioid-related cases and claims of the state and other Texas governmental persons and entities in exchange for a total payment of $63 million.
•In January 2022, EPI and EHSI executed a settlement agreement with the Florida Attorney General’s office intended to resolve opioid-related cases and claims of the state and other Florida governmental persons and entities in exchange for a total payment of up to $65 million.
•In February 2022, EPI and EHSI executed a settlement agreement with the Louisiana Attorney General’s office intended to resolve opioid-related cases and claims of the state and other Louisiana governmental persons and entities in exchange for a total payment of $7.5 million.
•In March 2022, EPI, EHSI and PPI executed a settlement agreement with the West Virginia Attorney General’s office intended to resolve opioid-related cases and claims of the state and other West Virginia governmental persons and entities in exchange for a total payment of $26 million.
Each agreement was solely by way of compromise and settlement and was not in any way an admission of wrongdoing, fault or liability of any kind by us or any of our subsidiaries.
While the specific terms of the agreements vary, the Alabama, Florida, Louisiana, Texas and West Virginia settlements are each subject to participation by the state’s political subdivisions. Certain agreements also provide for injunctive relief. Some agreements provide for additional payments in the event certain conditions, such as a comprehensive resolution of government-related opioid claims, are met; Florida may also be entitled to additional payments in the event we enter into a settlement with the attorney general of a state with a smaller population than Florida for an amount greater than $65 million prior to November 15, 2022.
To date, Florida and Texas have met the required participation thresholds. In some states, certain governmental entities have declined to participate in the settlements and/or actively taken steps to try to challenge the release of their claims. For example:
•The plaintiffs in Mobile County Board of Health, et al. v. Richard Sackler, et al., a case pending in the Circuit Court of Mobile County, Alabama, have to date refused to dismiss their claims against our subsidiaries. In April 2022, EPI and EHSI filed a motion in State of Alabama v. Endo Health Solutions Inc., et al., which is pending in the Circuit Court of Montgomery County, Alabama, seeking an order enjoining the Mobile County Board of Health plaintiffs from continuing their case and directing their compliance with the Alabama settlement. The Alabama Attorney General filed a brief supporting this motion, which remains pending. Meanwhile, the Mobile County Board of Health plaintiffs filed a separate motion in their own lawsuit, seeking a declaration that they are not bound by the Alabama settlement; the Mobile County court denied that motion in April 2022.
•In March 2022, two public hospitals in Florida filed an emergency motion to intervene in State of Florida v. Walgreen Co. to stay court approval of our subsidiaries’ settlement in Florida. In April 2022, the court denied the motion to intervene and entered a final consent judgment dismissing the state’s claims against EPI and EHSI with prejudice. Meanwhile, the Florida Attorney General commenced a separate declaratory judgment action against those same public hospitals, as well as additional public hospitals and a school board, in a different Florida state court, seeking a judicial declaration that their claims were released by the Florida Attorney General’s settlements with EPI, EHSI and other companies. The declaratory judgment action remains pending.
It is reasonably possible that other governmental persons or entities in states where we have reached settlements will bring similar challenges or otherwise continue to bring and/or litigate claims against us and our subsidiaries notwithstanding the settlements. We are unable to predict the outcome of these matters or to estimate the possible range of any losses that could be incurred. Adjustments to our overall liability accrual may be required in the future, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Certain settlement agreements provide for the creation of QSFs into which settlement funds will be deposited and/or provide for the repayment of some or all of the settlement amount under certain conditions. Depending on the terms of the respective agreements, funds deposited in QSFs have been and may continue to be considered restricted cash and/or restricted cash equivalents for a period of time subsequent to the initial funding. Distribution of funds from the QSF is conditioned upon certain criteria that vary by agreement.
We recorded total charges for opioid-related matters of $10.0 million during the three months ended March 31, 2022 and, as of March 31, 2022, our corresponding accrual totaled $268.7 million. In addition to the developments described above, our accrual for opioid-related matters as of March 31, 2022 includes amounts relating to certain unresolved matters for which, based on the progress of ongoing settlement negotiations and/or certain other factors, the Company believes a loss is probable and can reasonably be estimated. As further described below, the Company may be exposed to additional losses in excess of the amounts currently accrued, which could be material.
To the extent unresolved, we will continue to vigorously defend the foregoing matters and to explore other options as appropriate in our best interests, including entering into settlement negotiations and settlements even in circumstances where we believe we have meritorious defenses. Similar matters may be brought by others or the foregoing matters may be expanded. We are unable to predict the outcome of these matters or to estimate the possible range of any losses that could be incurred. Adjustments to our overall liability accrual may be required in the future, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
In addition to the lawsuits and administrative matters described above, the Company and/or its subsidiaries have received certain subpoenas, civil investigative demands (CIDs) and informal requests for information concerning the sale, marketing and/or distribution of prescription opioid medications, including but not limited to the following:
Various state attorneys general have served subpoenas and/or CIDs on EHSI and/or EPI. We are cooperating with the investigations.
In January 2018, EPI received a federal grand jury subpoena from the U.S. District Court for the Southern District of Florida seeking documents and information related to OPANA® ER, other oxymorphone products and marketing of opioid medications. We are cooperating with the investigation.
In December 2020, the Company received an administrative subpoena issued by the U.S. Attorney’s Office for the Western District of Virginia seeking documents related to McKinsey & Company. The Company received a related subpoena in May 2021, also issued by the U.S. Attorney’s Office for the Western District of Virginia. We are cooperating with the investigation.
Similar investigations may be brought by others or the foregoing matters may be expanded or result in litigation. We are unable to predict the outcome of these matters or to estimate the possible range of any losses that could be incurred. Adjustments to our overall liability accrual may be required in the future, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Ranitidine Matters
In June 2020, an MDL pending in the U.S. District Court for the Southern District of Florida, In re Zantac (Ranitidine) Products Liability Litigation, was expanded to add PPI and numerous other manufacturers and distributors of generic ranitidine as defendants. The claims are generally based on allegations that under certain conditions the active ingredient in Zantac® and generic ranitidine medications can break down to form an alleged carcinogen known as N-Nitrosodimethylamine (NDMA). The complaints assert a variety of claims, including but not limited to various product liability, breach of warranty, fraud, negligence, statutory and unjust enrichment claims. Plaintiffs generally seek various remedies including, without limitation, compensatory, punitive and/or treble damages; restitution, disgorgement, civil penalties, abatement, attorneys’ fees and costs as well as injunctive and/or other relief. Similar complaints against various defendants, in some instances including PPI, have also been filed in certain state courts, including California, Pennsylvania and Illinois. PPI and its subsidiaries have not manufactured or sold ranitidine since 2016.
The MDL court has issued various case management orders, including orders directing the filing of “master” and short-form complaints, establishing a census registry process for potential claimants and addressing various discovery issues. In December 2020, the court dismissed the master complaints as to PPI and other defendants with leave to amend certain claims. Certain plaintiffs, including third-party payers pursuing class action claims, have appealed the dismissal orders to the U.S. Court of Appeals for the Eleventh Circuit. In February 2021, various other plaintiffs filed an amended master personal injury complaint, a consolidated amended consumer economic loss class action complaint and a consolidated medical monitoring class action complaint. PPI was not named as a defendant in the consumer economic loss complaint or the medical monitoring complaint. In July 2021, the MDL court dismissed all claims in the master complaints as to PPI and other generic defendants with prejudice on federal preemption grounds. In November 2021, the MDL court issued a final judgment as to PPI and other generic defendants. Certain MDL plaintiffs have appealed the July 2021 dismissal order and/or the November 2021 judgment.
We will continue to vigorously defend the foregoing matters and to explore other options as appropriate in our best interests. Similar matters may be brought by others or the foregoing matters may be expanded. We are unable to predict the outcome of these matters or to estimate the possible range of any losses that could be incurred. Adjustments to our overall liability accrual may be required in the future, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Generic Drug Pricing Matters
Since March 2016, various private plaintiffs, state attorneys general and other governmental entities have filed cases against our subsidiary PPI and/or, in some instances, the Company, Generics Bidco I, LLC, DAVA Pharmaceuticals, LLC, DAVA International, LLC, EPI, EHSI and/or PPCI, as well as other pharmaceutical manufacturers and, in some instances, other corporate and/or individual defendants, alleging price-fixing and other anticompetitive conduct with respect to generic pharmaceutical products. These cases, which include proposed class actions filed on behalf of direct purchasers, end-payers and indirect purchaser resellers, as well as non-class action suits, have generally been consolidated and/or coordinated for pretrial proceedings in a federal MDL pending in the U.S. District Court for the Eastern District of Pennsylvania. There is also a proposed class action filed in the Federal Court of Canada on behalf of a proposed class of Canadian purchasers.
The various complaints and amended complaints generally assert claims under federal and/or state antitrust law, state consumer protection statutes and/or state common law, and seek damages, treble damages, civil penalties, disgorgement, declaratory and injunctive relief, costs and attorneys’ fees. Some claims are based on alleged product-specific conspiracies and other claims allege broader, multiple-product conspiracies. Under these overarching conspiracy theories, plaintiffs generally seek to hold all alleged participants in a particular conspiracy jointly and severally liable for all harms caused by the alleged conspiracy, not just harms related to the products manufactured and/or sold by a particular defendant.
The MDL court has issued various case management and substantive orders, including orders denying certain motions to dismiss, and discovery is ongoing.
We will continue to vigorously defend the foregoing matters and to explore other options as appropriate in our best interests. Similar matters may be brought by others or the foregoing matters may be expanded. We are unable to predict the outcome of these matters or to estimate the possible range of any losses that could be incurred. Adjustments to our overall liability accrual may be required in the future, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
In December 2014, our subsidiary PPI received from the Antitrust Division of the U.S. Department of Justice (DOJ) a federal grand jury subpoena issued by the U.S. District Court for the Eastern District of Pennsylvania addressed to “Par Pharmaceuticals.” The subpoena requested documents and information focused primarily on product and pricing information relating to the authorized generic version of Lanoxin® (digoxin) oral tablets and generic doxycycline products, and on communications with competitors and others regarding those products. We are cooperating with the investigation.
In May 2018, we and our subsidiary PPCI each received a CID from the DOJ in relation to a False Claims Act investigation concerning whether generic pharmaceutical manufacturers engaged in price-fixing and market allocation agreements, paid illegal remuneration and caused the submission of false claims. We are cooperating with the investigation.
Similar investigations may be brought by others or the foregoing matters may be expanded or result in litigation. We are unable to predict the outcome of these matters or to estimate the possible range of any losses that could be incurred. Adjustments to our overall liability accrual may be required in the future, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Other Antitrust Matters
Beginning in June 2014, multiple alleged purchasers of OPANA® ER sued our subsidiaries EHSI and EPI and other pharmaceutical companies, including Impax Laboratories, LLC (formerly Impax Laboratories, Inc. and referred to herein as Impax) and Penwest Pharmaceuticals Co., which our subsidiary EPI had acquired, alleging violations of antitrust law arising out of an agreement between EPI and Impax to settle certain patent infringement litigation and EPI’s introduction of reformulated OPANA® ER. Some cases were filed on behalf of putative classes of direct and indirect purchasers, while others were filed on behalf of individual retailers or health care benefit plans. The cases have been consolidated and/or coordinated for pretrial proceedings in a federal MDL pending in the U.S. District Court for the Northern District of Illinois. The various complaints assert claims under Sections 1 and 2 of the Sherman Act, state antitrust and consumer protection statutes and/or state common law. Plaintiffs generally seek damages, treble damages, disgorgement of profits, restitution, injunctive relief and attorneys’ fees. In June 2021, the court denied defendants’ motions for summary judgment, granted in part and denied in part certain evidentiary motions filed by defendants and granted direct and indirect purchaser plaintiffs’ motions for class certification. In August 2021, following an appeal and remand from the U.S. Court of Appeals for the Seventh Circuit, the district court amended its class certification order to certify a narrower end-payer class. A bifurcated liability and damages trial is currently scheduled to begin in June 2022; however, the timing of trials is uncertain due to the impact of COVID-19 and other factors.
Beginning in February 2009, the U.S. Federal Trade Commission (FTC) and certain private plaintiffs sued our subsidiaries PPCI (since June 2016, EGHI) and/or PPI as well as other pharmaceutical companies alleging violations of antitrust law arising out of the settlement of certain patent litigation concerning the generic version of AndroGel® and seeking damages, treble damages, equitable relief and attorneys’ fees and costs. The cases were consolidated and/or coordinated for pretrial proceedings in a federal MDL pending in the U.S. District Court for the Northern District of Georgia. In May 2016, plaintiffs representing a putative class of indirect purchasers voluntarily dismissed their claims with prejudice. In February 2017, the FTC voluntarily dismissed its claims against EGHI with prejudice. In June 2018, the MDL court granted in part and denied in part various summary judgment and evidentiary motions filed by defendants. In particular, among other things, the court rejected two of the remaining plaintiffs’ causation theories and rejected damages claims related to AndroGel® 1.62%. In July 2018, the court denied certain plaintiffs’ motion for certification of a direct purchaser class. In November 2019, PPI and PPCI entered into settlement agreements with all but one of the plaintiffs remaining in the MDL; a settlement with the remaining plaintiff was reached in April 2021. The settlement agreements were solely by way of compromise and settlement and were not in any way an admission of wrongdoing, fault or liability of any kind. Separately, in August 2019, several alleged direct purchasers filed suit in the U.S. District Court for the Eastern District of Pennsylvania asserting claims substantially similar to those asserted in the MDL, as well as additional claims against other defendants relating to other alleged conduct. In January 2020, the U.S. District Court for the Eastern District of Pennsylvania denied defendants’ motion to transfer venue to the Northern District of Georgia. The case is currently in discovery.
Beginning in May 2018, multiple complaints were filed in the U.S. District Court for the Southern District of New York against PPI, EPI and/or us, as well as other pharmaceutical companies, alleging violations of antitrust law arising out of the settlement of certain patent litigation concerning the generic version of Exforge® (amlodipine/valsartan). Some cases were filed on behalf of putative classes of direct and indirect purchasers; others are non-class action suits. The various complaints assert claims under Sections 1 and 2 of the Sherman Act, state antitrust and consumer protection statutes and/or state common law. Plaintiffs generally seek damages, treble damages, equitable relief and attorneys’ fees and costs. In September 2018, the putative class plaintiffs stipulated to the dismissal without prejudice of their claims against EPI and us, and the retailer plaintiffs later did the same. PPI filed a partial motion to dismiss certain claims in September 2018, which was granted in August 2019. In March 2022, the putative class plaintiffs filed motions for class certification. The court has ordered that the cases be trial-ready by January 2023; however, the timing of trials is uncertain due to the impact of COVID-19 and other factors.
Beginning in August 2019, multiple complaints were filed in the U.S. District Court for the Southern District of New York against PPI and other pharmaceutical companies alleging violations of antitrust law arising out the settlement of certain patent litigation concerning generic versions of Seroquel XR® (extended-release quetiapine fumarate). The claims against PPI are based on allegations that PPI entered into an exclusive acquisition and license agreement with Handa Pharmaceuticals, LLC (Handa) in 2012 pursuant to which Handa assigned to PPI certain rights under a prior settlement agreement between Handa and AstraZeneca resolving certain patent litigation. Some cases were filed on behalf of putative classes of direct and indirect purchasers; others are non-class action suits. The various complaints assert claims under Sections 1 and 2 of the Sherman Act, state antitrust and consumer protection statutes and/or state common law. Plaintiffs generally seek damages, treble damages, equitable relief and attorneys’ fees and costs. In October 2019, the defendants filed various motions to dismiss and, in the alternative, moved to transfer the litigation to the U.S. District Court for the District of Delaware. In August 2020, the Southern District of New York granted the motion to transfer without ruling on the motions to dismiss. In January 2021, the defendants filed motions to dismiss in the District of Delaware, which remain pending.
Beginning in June 2020, multiple complaints were filed against Jazz Pharmaceuticals and other pharmaceutical companies, including PPI, alleging violations of state and federal antitrust laws in connection with the settlement of certain patent litigation concerning generic versions of Xyrem® (sodium oxybate). Some cases were filed on behalf of putative classes of indirect purchasers; others are non-class action suits. The cases have been consolidated and/or coordinated for pretrial proceedings in a federal MDL pending in the U.S. District Court for the Northern District of California. The various complaints allege that Jazz entered into a series of “reverse-payment” settlements, including with PPI, to delay generic competition for Xyrem® and assert claims under Sections 1 and 2 of the Sherman Act, Section 16 of the Clayton Act, state antitrust and consumer protection statutes and/or state common law. Plaintiffs generally seek damages, treble damages, equitable relief and attorneys’ fees and costs. In April 2021, the defendants moved to dismiss the complaints that had been filed as of that time. In August 2021, the court issued an order dismissing certain aspects of the plaintiffs’ claims but otherwise denying the motions to dismiss. The cases are currently in discovery.
Beginning in June 2021, multiple complaints were filed on behalf of a putative class of direct purchasers in the U.S. District Court for the District of Massachusetts against Takeda Pharmaceuticals, PPI and us, alleging violations of federal antitrust law in connection with the settlement of certain patent litigation related to generic versions of Amitiza® (lubiprostone). The complaints allege that Takeda and PPI entered into a settlement agreement that delayed the entry of generic Amitiza® and assert claims under Section 1 and Section 2 of the Sherman Act. Plaintiffs seek damages, treble damages and attorneys’ fees and costs. In September 2021, the plaintiffs voluntarily dismissed all claims against Endo International plc. In December 2021, PPI filed a motion to dismiss, which remains pending.
In August 2021, a putative class action complaint was filed in the U.S. District Court for the Eastern District of Pennsylvania against Takeda Pharmaceuticals, EPI, PPI and others, alleging violations of federal antitrust law in connection with the settlement of certain patent litigation related to generic versions of Colcrys® (colchicine). The complaint alleged, among other things, that a distribution agreement between Takeda and PPI with respect to an authorized generic was in effect an output restriction conspiracy. The plaintiff asserts claims under Section 1 and Section 2 of the Sherman Act and seeks damages, treble damages and attorneys’ fees and costs. In December 2021, the court dismissed the complaint for failure to state a claim (the plaintiff had already voluntarily dismissed all claims against EPI in November 2021). In January 2022, the plaintiff filed an amended complaint. In February 2022, the defendants filed a motion to dismiss the amended complaint, which the court granted in part and denied in part in March 2022. The case is currently in discovery.
In January 2021, the FTC filed a lawsuit in the U.S. District Court for the District of Columbia against us, EPI, Impax Laboratories, LLC and Amneal Pharmaceuticals, Inc., generally alleging that the 2017 settlement of a contract dispute between EPI and Impax (now Amneal) constituted unfair competition in violation of Section 5(a) of the FTC Act. The complaint generally sought injunctive and equitable monetary relief. In April 2021, the defendants filed motions to dismiss, which the court granted in March 2022.
To the extent unresolved, we will continue to vigorously defend the foregoing matters and to explore other options as appropriate in our best interests. Similar matters may be brought by others or the foregoing matters may be expanded. We are unable to predict the outcome of these matters or to estimate the possible range of any losses that could be incurred. Adjustments to our overall liability accrual may be required in the future, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Securities Litigation
In June 2020, a putative class action entitled Benoit Albiges v. Endo International plc, Paul V. Campanelli, Blaise Coleman, and Mark T. Bradley was filed in the U.S. District Court for the District of New Jersey by an individual shareholder on behalf of himself and all similarly situated shareholders. The lawsuit alleges violations of Section 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder relating to the marketing and sale of opioid medications and the New York Department of Financial Services’ administrative action against the Company, EPI, EHSI, PPI and PPCI. In September 2020, the court appointed Curtis Laakso lead plaintiff in the action. The plaintiffs filed an amended complaint in November 2020. In January 2021, the defendants filed a motion to dismiss, which the court granted in August 2021. In November 2021, the plaintiffs filed a second amended complaint, which among other things added allegations about discovery issues in certain opioid-related lawsuits. In January 2022, the defendants moved to dismiss the second amended complaint.
To the extent unresolved, we will continue to vigorously defend the foregoing matter and to explore other options as appropriate in our best interests. Similar matters may be brought by others or the foregoing matter may be expanded. We are unable to predict the outcome of this matter or to estimate the possible range of any losses that could be incurred. Adjustments to our overall liability accrual may be required in the future, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Other Government Investigations
In March 2022, EPI received a CID from the Texas Attorney General’s office seeking documents and information related to hormone blocker products. This followed the Texas Attorney General’s December 2021 announcement of an investigation into whether EPI and AbbVie Inc. had advertised or promoted such products, including SUPPRELIN® LA and VANTAS®, for unapproved uses. We are cooperating with the investigation.
Similar investigations may be brought by others or the foregoing matter may be expanded or result in litigation. We are unable to predict the outcome of this matter or to estimate the possible range of any losses that could be incurred. Adjustments to our overall liability accrual may be required in the future, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
VASOSTRICT® Related Matters
Beginning in April 2018, PSP LLC and PPI received notice letters from Eagle Pharmaceuticals, Inc. (Eagle), Sandoz, Inc., Amphastar Pharmaceuticals, Inc., Amneal Pharmaceuticals LLC, American Regent, Fresenius Kabi USA, LLC (Fresenius), Dr. Reddy’s Laboratories, Inc., Aurobindo Pharma Limited and Gland Pharma Limited advising of the filing by such companies of Abbreviated New Drug Applications (ANDAs)/New Drug Applications (NDAs) for generic versions of VASOSTRICT® (vasopressin IV solution (infusion)) 20 units/ml and/or 200 units/10 ml. Beginning in May 2018, PSP LLC, PPI and Endo Par Innovation Company, LLC filed lawsuits against Eagle, Sandoz, Inc., Amphastar Pharmaceuticals, Inc., Amneal Pharmaceuticals LLC, American Regent and Fresenius in the U.S. District Court for the District of Delaware or New Jersey within the 45-day deadline to invoke a 30-month stay of U.S. Food and Drug Administration (FDA) approval pursuant to the Hatch-Waxman legislative scheme. In December 2020, we separately filed suit against Eagle, Amneal Pharmaceuticals LLC, Dr. Reddy’s Laboratories, Inc. and Aurobindo Pharma Limited in the U.S. District Court for the District of New Jersey in connection with a newly issued VASOSTRICT® genotyping patent. Beginning in May 2020 through January 2021, we reached settlements with American Regent, Sandoz, Inc., Amphastar Pharmaceuticals, Inc., Fresenius, Aurobindo Pharma Limited and Dr. Reddy’s Laboratories, Inc. We have voluntarily dismissed all cases pending against those defendants. The remaining Delaware cases against Eagle and Amneal Pharmaceuticals LLC have been consolidated and a trial was held in July 2021. In August 2021, the court issued an opinion holding that Eagle’s proposed generic product will not infringe PPI’s asserted patent claims. We have appealed the ruling. The court made no finding regarding the validity of the patents. During the first quarter of 2022, multiple competitive generic alternatives to VASOSTRICT® were launched, beginning with Eagle’s generic that was launched at risk and began shipping toward the end of January 2022. Since then, additional competitive alternatives have entered the market, including an authorized generic. These launches began to significantly impact both Endo’s market share and product price toward the middle of the first quarter of 2022, and the effects of competition have since increased and are likely to continue to increase throughout 2022 and beyond. This competition could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Other Proceedings and Investigations
Proceedings similar to those described above may also be brought in the future. Additionally, we are involved in, or have been involved in, arbitrations or various other proceedings that arise from the normal course of our business. We cannot predict the timing or outcome of these other proceedings. Currently, neither we nor our subsidiaries are involved in any other proceedings that we expect to have a material effect on our business, financial condition, results of operations and cash flows.
NOTE 14. OTHER COMPREHENSIVE INCOME
During the three months ended March 31, 2022 and 2021, there were no tax effects allocated to any component of Other comprehensive income and there were no reclassifications out of Accumulated other comprehensive loss. Substantially all of the Company’s Accumulated other comprehensive loss balances at March 31, 2022 and December 31, 2021 consist of Foreign currency translation loss.
NOTE 15. SHAREHOLDERS’ DEFICIT
The following table presents a reconciliation of the beginning and ending balances in Total shareholders’ deficit for the three months ended March 31, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Euro Deferred Shares | | Ordinary Shares | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total Shareholders’ Deficit |
| | | | | | | | | | | |
| | | | | | | | | | | |
BALANCE, DECEMBER 31, 2021 | $ | 45 | | | $ | 23 | | | $ | 8,953,906 | | | $ | (9,981,515) | | | $ | (216,445) | | | $ | (1,243,986) | |
Net loss | — | | | — | | | — | | | (71,974) | | | — | | | (71,974) | |
Other comprehensive income | — | | | — | | | — | | | — | | | 1,895 | | | 1,895 | |
Compensation related to share-based awards | — | | | — | | | 4,929 | | | — | | | — | | | 4,929 | |
| | | | | | | | | | | |
Tax withholding for restricted shares | — | | | — | | | (1,863) | | | — | | | — | | | (1,863) | |
Other | (1) | | | 1 | | | 1 | | | — | | | — | | | 1 | |
BALANCE, MARCH 31, 2022 | $ | 44 | | | $ | 24 | | | $ | 8,956,973 | | | $ | (10,053,489) | | | $ | (214,550) | | | $ | (1,310,998) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
The following table presents a reconciliation of the beginning and ending balances in Total shareholders’ deficit for the three months ended March 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Euro Deferred Shares | | Ordinary Shares | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total Shareholders’ Deficit |
| | | | | | | | | | | |
| | | | | | | | | | | |
BALANCE, DECEMBER 31, 2020 | $ | 49 | | | $ | 23 | | | $ | 8,938,012 | | | $ | (9,368,270) | | | $ | (217,753) | | | $ | (647,939) | |
Net income | — | | | — | | | — | | | 41,524 | | | — | | | 41,524 | |
Other comprehensive income | — | | | — | | | — | | | — | | | 1,692 | | | 1,692 | |
Compensation related to share-based awards | — | | | — | | | 9,993 | | | — | | | — | | | 9,993 | |
Exercise of options | — | | | — | | | 622 | | | — | | | — | | | 622 | |
Tax withholding for restricted shares | — | | | — | | | (4,863) | | | — | | | — | | | (4,863) | |
Other | (2) | | | — | | | — | | | — | | | — | | | (2) | |
BALANCE, MARCH 31, 2021 | $ | 47 | | | $ | 23 | | | $ | 8,943,764 | | | $ | (9,326,746) | | | $ | (216,061) | | | $ | (598,973) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Share-Based Compensation
The Company recognized share-based compensation expense of $4.9 million and $10.0 million during the three months ended March 31, 2022 and 2021, respectively. As of March 31, 2022, the total remaining unrecognized compensation cost related to non-vested share-based compensation awards amounted to $20.2 million.
As of March 31, 2022, the weighted average remaining requisite service period for non-vested restricted stock units and performance share units was 1.6 years.
NOTE 16. OTHER EXPENSE, NET
The components of Other expense, net for the three months ended March 31, 2022 and 2021 are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, | | |
| | | | | 2022 | | 2021 | | |
Net loss on sale of business and other assets (1) | | | | | $ | 135 | | | $ | 355 | | | |
Foreign currency loss, net (2) | | | | | 1,712 | | | 1,385 | | | |
Net loss from our investments in the equity of other companies (3) | | | | | 86 | | | 151 | | | |
Other miscellaneous, net | | | | | (644) | | | (979) | | | |
Other expense, net | | | | | $ | 1,289 | | | $ | 912 | | | |
__________
(1)Amounts primarily relate to the sales of certain intellectual property rights and certain other assets.
(2)Amounts relate to the remeasurement of the Company’s foreign currency denominated assets and liabilities.
(3)Amounts relate to the income statement impacts of our investments in the equity of other companies, including investments accounted for under the equity method.
NOTE 17. INCOME TAXES
The following table displays our (Loss) income from continuing operations before income tax, Income tax (benefit) expense and Effective tax rate for the three months ended March 31, 2022 and 2021 (dollars in thousands):
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, | | |
| | | | | 2022 | | 2021 | | |
(Loss) income from continuing operations before income tax | | | | | $ | (67,115) | | | $ | 47,783 | | | |
Income tax (benefit) expense | | | | | $ | (1,815) | | | $ | 724 | | | |
Effective tax rate | | | | | 2.7 | % | | 1.5 | % | | |
The change in Income tax (benefit) expense for the three months ended March 31, 2022 compared to the prior year period primarily relates to the decrease in pre-tax earnings.
The Company maintains a full valuation allowance against the net deferred tax assets in the U.S., Luxembourg and certain other foreign tax jurisdictions as of March 31, 2022. It is possible that within the next 12 months there may be sufficient positive evidence to release a portion or all of the valuation allowance. Release of these valuation allowances would result in a benefit to income tax expense for the period the release is recorded, which could have a material impact on net earnings. The timing and amount of the potential valuation allowance release are subject to significant management judgment and prospective earnings.
On June 3, 2020, in connection with the IRS’s examination of our U.S. income tax return for the fiscal year ended December 31, 2015 (2015 Return), we received an acknowledgement of facts (AoF) from the IRS related to transfer pricing positions taken by Endo U.S., Inc. and its subsidiaries (Endo U.S.). The AoF asserted that Endo U.S. overpaid for certain pharmaceutical products that it purchased from certain non-U.S. related parties and proposed a specific adjustment to our 2015 U.S. income tax return position. On September 4, 2020, we received a Form 5701 Notice of Proposed Adjustment (NOPA) that is consistent with the previously disclosed AoF. We believe that the terms of the subject transactions are consistent with comparable transactions for similarly situated unrelated parties, and we intend to contest the proposed adjustment. While the NOPA is not material to our business, financial condition, results of operations or cash flows, the IRS could seek to apply its position to subsequent tax periods and propose similar adjustments. The aggregate impact of these adjustments, if sustained, could have a material adverse effect on our business, financial condition, results of operations and cash flows. Although the timing of the outcome of this matter is uncertain, it is possible any final resolution of the matter could take a number of years.
In connection with the IRS’s examination of our 2015 Return, on December 31, 2020, the IRS issued a Technical Advice Memorandum (TAM) that we previously disclosed regarding the portion of our 2015 NOL that we believe qualifies as a specified product liability loss (SLL). The TAM concurred in part with our positions on the 2015 Return but disagreed with our position that the AMS worthless stock loss qualifies as an SLL. On April 23, 2021, we received draft NOPAs from the IRS consistent with the TAM. We continue to disagree with the IRS’s position and the draft NOPAs received and, if necessary, intend to contest any additional tax determined to be owed with respect to the NOPAs. However, if we were unsuccessful in contesting the IRS’s position, we have preliminarily estimated that we would have additional cash taxes payable to the IRS of between $70 million and $250 million excluding interest. We continue to discuss this position with the IRS and the actual amount that may be owed to the IRS if we are unsuccessful may be different than our preliminary estimate. Although the timing of the outcome of this matter is uncertain, it is possible any final resolution of the matter could take a number of years.
NOTE 18. NET (LOSS) INCOME PER SHARE
The following is a reconciliation of the numerator and denominator of basic and diluted net (loss) income per share for the three months ended March 31, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, | | |
| | | | | 2022 | | 2021 | | |
Numerator: | | | | | | | | | |
(Loss) income from continuing operations | | | | | $ | (65,300) | | | $ | 47,059 | | | |
| | | | | | | | | |
| | | | | | | | | |
Loss from discontinued operations, net of tax | | | | | (6,674) | | | (5,535) | | | |
Net (loss) income | | | | | $ | (71,974) | | | $ | 41,524 | | | |
Denominator: | | | | | | | | | |
For basic per share data—weighted average shares | | | | | 233,879 | | | 230,551 | | | |
Dilutive effect of ordinary share equivalents | | | | | — | | | 8,120 | | | |
| | | | | | | | | |
For diluted per share data—weighted average shares | | | | | 233,879 | | | 238,671 | | | |
Basic per share amounts are computed based on the weighted average number of ordinary shares outstanding during the period. Diluted per share amounts are computed based on the weighted average number of ordinary shares outstanding and, if there is net income from continuing operations during the period, the dilutive effect of ordinary share equivalents outstanding during the period.
The dilutive effect of ordinary share equivalents is measured using the treasury stock method. Any stock options and/or awards that have been issued but for which a grant date has not yet been established are not considered in the calculation of basic or diluted weighted average shares.
The following table presents, for the three months ended March 31, 2022 and 2021, outstanding stock options and stock awards that could potentially dilute per share amounts in the future that were not included in the computation of diluted per share amounts for the periods presented because to do so would have been antidilutive (in thousands):
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, | | |
| | | | | 2022 | | 2021 | | |
Stock options | | | | | 6,005 | | | 3,734 | | | |
Stock awards | | | | | 7,553 | | | 103 | | | |
NOTE 19. SUBSEQUENT EVENT
In May 2022, we announced that our Endo Ventures Limited subsidiary had acquired six development-stage ready-to-use injectable product candidates from Nevakar Injectables, Inc., a subsidiary of Nevakar, Inc., for an upfront cash payment of $35 million. This transaction meaningfully expands our Sterile Injectables segment’s ready-to-use product pipeline. The product candidates are in various stages of development, with the first launch expected in 2025. With this acquisition, the Company will control all remaining development, regulatory, manufacturing and commercialization activities for the acquired product candidates.